Editor’s note: This is a guest post by Linus Minick who is an online marketing professional
Starting any business is inherently difficult. A great idea can only get you so far with limited funds. E-commerce sites face this same struggle. While there is more to beginning startups than simply fundraising, it will eventually become essential. Luckily, there are many avenues startups can take in order to raise the funds needed to establish a business, help grow a business, and sometimes even find new customers and grow a new business’ niche audience. All types of investing has risks, pros and cons. Depending on what startup you are developing, it is important to know your different funding opportunities.
An angel investor is an individual who provides seed money for starting a business, or ongoing support to help carry a company through times of financial struggle. Once, you do find an angel investor, be prepared to start negotiating. Those who invest in startups as angel investors often want partial ownership of the business. It is up to the business owners to weigh the amount of the investment to the amount of equity they will lose in their own business.
Many times angel investors are connected to the business owner, such as a family or friend. They are not always the super-wealthy entrepreneurs you imagine when you think of investors, so amounts of seed money vary greatly with angel investors. This form of fundraising is a great choice for a smaller startups or e-commerce sites. Angel investors are the easiest to find, they can be your neighbor, mother or found through online funding sites interested in investing in startups.
Angel investors do expect a certain rate of return, but also offer the greatest range in amount of investment. Again, these can be family members or an investor. Depending on who is investing, amounts of money or expertise will vary. Keep in mind, whenever you give up part ownership of your business, you may be fighting over decisions with your investors at later times.
Venture capitals generally invest in startups expecting to see a profit. They are capitalists and entrepreneurs who tend to be business savvy to some degree. They have deep pockets, so they can usually invest more than the typical angel investor. Venture capitalists may have a stronger desire to be part of the consulting and management efforts, which depending on your investor could be a great asset.
Be wary, as this can easily become a hurdle if your investor and you have different visions for your startup. An investment from a venture capitalist would be perfect for larger startups or e-commerce sites since investors have more equity to invest. They can also offer their expertise in guiding your business to a successful and profitable business venture. In fact, may even decide to bring their other deep-pocketed friends around if they really believe in your company.
An investment from an investment capitalist would be perfect for larger startups or e-commerce sites since investors have more equity to invest. They can also offer their expertise in guiding your business to a successful and profitable business venture. In fact, may even decide to bring their other deep-pocketed friends around if they really believe in your company.
Venture capitalists expect much higher returns on their investments than angel investors. They are also very deliberate in their business decisions, meaning it may take months before anything is on paper, and funds are received. As they will be investing more than angel investors they will also be asking for a larger claim to your business.
Private equity investments work in a similar way to a venture capitalist investment. A private equity fund that invests in your company will eventually looks to sell its stake in your business for a profit. An investment from a private equity fund would not be realistic for a small startup or smaller business. They are big players, with big pockets, and are usually looking to invest $100 million or more.
This type of fundraising can get complicated quickly. Private equity funds offer various types of investments including leveraged buyouts, growth capital, and mezzanine financing. These all have their own agendas and are not all ideal for startups. Perhaps the most efficient use of a private equity investment in terms of startups would be to fuel business growth rather than using their investment to build your company from the foundation up.
If you have heard of Kickstarter or Indiegogo, you have heard of crowdfunding. Many people invest small amounts in order to help an individual launch a business, product, or organization. This can be extremely lucrative if your business niche has a very passionate following. This would work best if your e-commerce site is also developing their own products. This could also work if you have an idea for a single product, and you need funds to develop the product and launch the e-commerce site that will sell the product.
Crowdfunding allows the business owner to retain all stakes in their business. While Kickstarter has “rewards” programs, these are used to encourage people to donate, and are generally less costly than forfeiting partial ownership of your startup. Another great aspect of crowdfunding is it is a public request. This can help build traction for your business and build an audience before your business even launches.
This is two sided as crowdfunding will get you nowhere if people aren’t aware of your campaign. This means money may have to be funneled into promoting the request itself, which may be difficult if you are already in need of funds. Overall, crowdfunding should be used for more niche products that will become the impetus for creating your e-commerce site.
Remember that starting a business is going to require sacrifice, time, and a considerable amount of energy. Do not become discouraged as you may be surprised at how little money needs to be raised in order to start a business. Weigh your investment options with your particular niche, product and audience.
Always keep in mind that when individuals invest, they are always expecting something in return. Whether that is a stake in your company, decision making abilities or simply selling their stake for a profit of their own at a later time, taking any non-monetary assets they provided with them. It is up to you to be informed, and make the best decisions based on your goals and how you want to run your startup.
About the author
Linus Minick has worked for multiple online marketing firms including two start-ups. He is experienced in local online marketing, content marketing, and e-commerce SEO strategy. In his free-time, he enjoys writing and blogging.